Professional Documents
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Sitka Pacific Capital Management, LLC Value Investing From the Top-Down
Cheap Stocks
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(0.7x-1.8x)
A Great Product
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Emerging Market Consumers, Commodity Producers The Wealthy Globally (the 1%) Long history of consistent demand with occasional spikes Widely coveted as an aspirational good
Cache
Limited Supply
Highly regulated, capital intensive, difficult jurisdictions, long supply response time
Centuries of consumers around the world willing to pay ever higher prices Often displays NEGATIVE demand elasticity (demand rises with price)- bubble prone
Gourmet Coffee? Single Malt Scotch? Fine Wine? Art? Resort Property? NO.. GOLD!
Its perfectly understandable for traditional value investors to have an aversion to gold
Gold is a great thing to sew onto your garments if youre a Jewish family in Vienna in 1939 but I think civilized people wont buy gold they invest in productive businesses. Charlie Munger
but it is not rational. Gold is not in competition with stocks any more than cash is. Holding gold is necessary when holding currency may be detrimental to protecting future purchasing (or investing) power. WWBGD?
You either believe gold is money or you dont Forced religious conversions are messy affairs
Where is the margin of safety in a stock that produces something that is hard to value? What value do these companies have at current gold prices? or if gold goes down? What conditions make NOW a good time to own mining stocks? What would make us change our thesis; what are the risks?
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3. 4.
What would make gold go much, much higher? What are these stocks worth then?
Determining Intrinsic Value: 1. Cash flow from current production available to shareholders
Cash
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Proven and probable reserves (P/NAV, P/ Oz.) Resource optionality (Black-Scholes or wait until free!)
Ticker
P/NAV
Goldenstar Resources
GSS
$340mm
2.4x
2.2x
0.49
$83 ($1,202)
IAMGOLD
IAG
$4.3B
7.0x
4.3x
0.78
$289 ($700)
Source: BofA ML
If Mr. Market sold us the four largest producers ~$7,500 per oz of Production (5 years at current production and prices) ~$348 per oz of RESERVES ~$507 cash costs for us to extract ~$855 per oz to purchase and then produce something we can sell for ~$1,600 per oz in spot market
Annual Production: 5mm oz P&P Reserves: 100mm oz (at $1,200 gold) Market Cap (~$25B)=
3.3yrs
of production at current prices, levels $281/oz of P&P reserves + $659 (or lower) cash costs we get company for $940/oz
Profitable Reserves: 5% delta to $950 6% increase in gold 17% increase in EPS Gold linked dividend policy- ~3%
Newmont Continued
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Aswath Damodaran: compare the price you are paying for growth
with the value of growth
EV: $27.9B Value of Assets: $44.8B $16.9B UNDERVALUED (60%) Value of Growth: $10.1B Intrinsic Equity: $52B $27B UNDERVALUED (108%)
In 2011:
Cash Costs: $580/oz All-in Costs: $1,191/oz Avg Price: $1,573/oz Avg. All-in Margin: $382/ oz or 24.2%
In 2011: All-in Costs: $1,191/oz Avg Price: $1,573/oz Avg. All-in Margin: $382/ oz or 24.2% In 2012???? All-in Costs: $1,432/oz Avg Price: LOWER? Avg. All-in Margin at $1573: $141/ oz or ONLY 9.0%!
A 62% drop in margins is feared/expected?!!
Rising Cost Pressures: Energy prices, especially diesel Mining equipment prices, driven by higher base metal prices among other things Wages for relatively scarce mining-related labor (though SG&A appears fairly well contained) Merger & Acquisition costs Taxes, Environmental and Regulatory Costs, etc.
Miners In Summary
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Investors are extrapolating recent gold price weakness and thus sentiment is very negative Mining stocks are pricing in lower gold prices AND/OR higher input costs based on NEGATIVE market implied growth rates If gold rises OR cost pressures abate (proxy: global commodity prices) miners are very attractive Mining stocks respond very favorably to environments where the economy is weakening, real interest rates are falling, and the stocks are priced inexpensively relative to the metal.
Is this responsible?
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Risks
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Specific to Miners: Increased taxation, environmental & govt regulation (corporate repression) Poor Management Liquidation type sell off will hurt miners like any other asset (opportunity) An organic, non-stimulus driven economic recovery featuring a strong dollar and shrinking CB balance sheets. That was a joke.
How to Hedge
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Short Energy Stocks (ex NG) Short Building/Construction Materials Stocks Short Transportation Stocks Long the USD
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